Maryland May Shift Pension Burdens to Local Government

A key piece of Maryland Gov. Martin O’Malley’s (D) legislative agenda this year involves shifting some government employee pension costs away from the state and requiring county governments to make up the difference.

In Maryland, as in the rest of the nation, the growing cost of public pensions remains a primary fiscal and political concern. Last year the state enacted a significant reform of its pension plan, decreasing benefits, raising contribution rates, and lengthening vesting periods in an attempt to rein in spending.

Despite the reforms, a structural budget deficit is forcing the state to look for additional savings again this year. Over the past decade the annual cost of funding Maryland’s public school teacher pensions has more than doubled, increasing from $403 million in 2001 to $900 million in 2011.

100% on State’s Shoulders

The proposed cost shift stem from Maryland’s unusual method of financing teacher pensions. Although county governments employ public school teachers, the state pays the full cost of employer pension contributions. The same is true of local library and community college employees.

While the state has been paying the costs associated with these retirement programs since 1927, this practice is rare. Texas and Kansas are the only other states to pay the full cost of teacher pension contributions. Part of Maryland’s outlier status stems from the fact the state’s local school boards also lack independent taxing authority, making them financially dependent on annual appropriations from county governments.

Aside from Maryland, only eight other states do not grant local school boards independent taxing authority.

$239 Million Burden on Counties

Unsurprisingly, Maryland’s county governments show little enthusiasm for the proposed cost shift unenthusiastically. In fiscal year 2013, the state’s counties face the prospect of being responsible for an additional $239 million in costs, at a time of lean local budgets and state aid. Although O’Malley’s plan includes some features designed to mitigate the burden in the coming year, future costs will increase significantly. The result is likely to be local tax increases.

While perhaps not a popular result, forging a more direct link in the public’s mind between local tax levels and local employee pension costs could engender more public interest in school board elections and union contract negotiations.

The proposed cost shift was one of several reforms suggested by the Blue Ribbon Commission responsible for identifying ways to ensure the state’s pension system remains sustainable. O’Malley opted not to phase in the cost shift or include an explicit wealth-equalization component. Doing so might have made the proposal more palatable to the counties, but it would have significantly reduced the savings to the state budget.

Skeptical Response

Attempts to justify the cost shift as more than purely a budgetary necessity have met with only partial success.

Supporters of the cost shift argue counties have been able to increase teacher salaries excessively because the full cost of the pensions associated with those salaries is not paid by the counties.

Opponents point out the counties are not the ones that negotiate salary levels with teachers—that responsibility falls to local school boards, over whose actions the county governments have little influence. Indeed, although some of the blame for the pension system’s current shortfall does rest on increasing salary levels, a large portion is also due to unreasonable benefits adopted at the state level, inadequate funding in prior years, and poor investment returns throughout the recent financial downturn.

Teachers Union Opposition

The Maryland State Education Association (MSEA, the state’s teachers union) staunchly opposes cost shifting, and last year it compiled figures claiming a shift could result in more than 2,800 lost jobs. That estimate assumes counties would make up for the cost shift solely by laying off teachers.

Instead, news reports from around the state have quoted various local school board officials warning a cost shift would affect their ability to offer salary increases at the bargaining table. This is precisely the intended effect. Nevertheless, the cost shift does raise important questions about recruiting and retaining teachers given the fiscal constraints that Maryland—and the rest of the country—will be facing in the coming years.

Part of the answer may come from reforms related to Race to the Top, a federal competitive grant program created in 2009. Maryland, along with several other states, is in the midst of adopting teacher evaluation processes to identify and reward high-quality teachers and allow the state to dismiss ineffective teachers when necessary. Public pensions are expensive, and there is little sense in continually offering generous benefits in cases of ineffective performance.

Bucks Must Stop

The inescapable conclusion of Maryland’s proposed cost shift of teacher pension contributions is that buck must stop somewhere. If counties find their residents unwilling to shoulder higher tax burdens, and the state is unwilling to continue assuming the burden the pensions pose, it may be time for Maryland and other states in similar positions to consider more than incremental reforms.

Hybrid retirement plans that combine a smaller state-financed portion along with individual employee accounts have the potential to offer cost savings, not merely cost shifting.

Whether legislators have the political will to seriously consider such an alternative will depend on how Maryland’s citizens react to the increased costs associated with funding public pensions.